The Small Business Health Care Tax Credit
This credit is designed to help you offset the costs of providing health insurance to your employees.
If you're a small employer and meet certain requirements, the credit can be up to 50% (35% for eligible tax exempt employers) of the premiums you pay for providing health insurance.
This information is only an overview to help you understand the credit and how it can benefit you.
There are three basic requirements to be eligible for the Small Business Health Care Tax Credit. They are:
- You paid premiums for employee health insurance coverage under a qualifying arrangement.
- You had fewer than 25 full-time equivalent employees (FTEs) for the tax year.
- You paid average annual wages for the tax year of less than $55,000 per FTE in 2019.
Employers treated as a single employer
The following employers are treated as a single employer to figure the credit:
- Employers who are corporations in a controlled group of corporations.
- Employers who are members of an affiliated service group.
- Employers who are partnerships, proprietorships, etc., under common control. See Regulations sections 1.414(c)-2, 1.414(c)-3, and 1.414(c)-4.
- Tax-exempt employers under common control. See Regulations section 1.414(c)-5.
Unless an exception applies, only one Form 8941 can be filed with a tax return. See the instructions for Form 8941 for additional information.
Beginning in 2014, the credit period during which the credit can be claimed is a 2 consecutive tax year period beginning with the first tax year in which:
- An eligible small employer (or any predecessor) files an income tax return with an attached Form 8941, or
- A tax-exempt eligible small employer (or any predecessor) files Form 990-T with an attached Form 8941.
In general, all employees who perform services for you during the tax year are taken into account in determining your FTEs, average annual wages, and premiums paid.
You can generally calculate your FTEs by adding up the hours of service for all of your employees (but not more than 2,080 hours per employee) and then dividing that by 2,080 (which is a full time employee - 40 hours a week at 52 weeks per year).
Premiums paid on behalf of a former employee with no hours of service may be treated as paid on behalf of an employee for purposes of figuring the credit provided that, if so treated, the former employee is also treated as an employee for purposes of the uniform percentage requirement.
Do not use premiums paid by the leasing organization to figure your credit. Also, a leased employee who is not a common law employee is considered an employee for credit purposes if he or she does all the following:
- Provides services to you under an agreement between you and a leasing organization,
- Has performed services for you (or for you and a related person) substantially full time for at least 1 year, and
- Performs services under your primary direction or control.
But do not use hours, wages, or premiums paid with respect to the initial year of service on which leased employee status is based.
Employees who perform labor or services on a seasonal basis and perform labor or services for you 120 or fewer days during the tax year are not considered employees in determining FTEs and average annual wages. But premiums paid on their behalf are counted in determining the amount of the credit.
Seasonal workers include retail workers employed exclusively during holiday seasons. Seasonal workers also include workers employed exclusively during the summer.
Household and Other Nonbusiness Employees
Household employees and other employees who are not performing services in your trade or business are considered employees if they otherwise qualify as discussed above. A sole proprietor must include both business and nonbusiness employees to determine FTEs, average annual wages, and premiums paid.
MinistersA minister performing services in the exercise of his or her ministry is treated as self-employed for Social Security and Medicare purposes.
However, for credit purposes, whether a minister is an employee or self-employed is determined under the common law test for determining worker status. Self-employed ministers are not considered employees.
The following individuals are not considered employees when you figure this credit. Hours and wages of these employees and premiums paid for them are not counted when you figure your credit.
- The owner of a sole proprietorship.
- A partner in a partnership.
- A shareholder who owns (after applying the section 318 constructive ownership rules) more than 2% of an S corporation.
- A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation.
- A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation.
- Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Family members include:
- A child (or descendant of a child),
- A sibling or step-sibling,
- A parent (or ancestor of a parent),
- A step-parent,
- A niece or nephew,
- An aunt or uncle,
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Count both the time your employees worked for you and for the time that you paid (and were supposed to pay) them for time off, such as vacation, holidays, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
Also, if any of your employees took more than 160 hours of continuous paid time off (as described above) you only need to count the first 160 hours. If your employees have more than 2,080 hours, only count the first 2,080.
You can count your employees' time by one of three methods:
- Actual Hours: Determine actual hours of service from records of hours worked and hours for which payment is made or due.
- Days-worked equivalency: Your employee is credited with 8 hours of work each day he or she worked (and received paid time off) for you at least one hour.
- Weeks-worked equivalency: Your employee is credited with 40 hours of work for each week he or she worked (and received paid time off) for you at least one hour.
Your credit will begin to phase out if you have more than 10 FTEs and completely phases out if you have 25 or more.
A qualifying arrangement is generally an arrangement that requires you to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee's health insurance coverage.
An arrangement that offers different tiers of coverage (for example, self-only, self-plus one, and family coverage) is generally a qualifying arrangement if it requires you to pay a uniform percentage (not less than 50%) separately for each tier of coverage you offer.
Beginning in 2014, to be a qualifying arrangement you must also purchase your employees' insurance through a SHOP Marketplace.
You pay 50% of the cost of self-coverage for all your employees. This leaves your employees who are enrolled in more expensive coverage - such as self plus one or family - to pay the additional cost.
Then, even though you pay less than 50% of the cost of self plus one and family coverage, you may still be eligible because you paid 50% of what would have been charged for self-coverage.
You can find the average annual wages you paid to your FTEs by dividing the total wages you paid to all your employees (other than the employees that aren't counted) by the number of your FTEs.
However, only count the wages subject to Social Security and Medicare withholding, disregarding the wage base limit.
The wage phase out is indexed to inflation. For 2018, the credit will begin to phase out when the average annual wages are more than $26,000 and falls to zero when the wages reach $54,000. This phase out is in addition to the FTE phase out.
You can claim the credit only for premiums you paid for health insurance coverage under a qualifying arrangement, and only for people counted as employees for credit purposes.
A wellness program is generally an insurance program of health promotion or disease prevention. If you pay part or all of the cost of an employee's participation in a wellness program, use the amount you paid to figure your employer premiums paid.
A tobacco surcharge is generally an additional amount charged for insurance for a tobacco user. If you pay part or all of an employee's tobacco surcharge, you cannot use the amount you paid to figure your employer premiums paid.
Dependent coverage is generally coverage offered separately to an individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant-employee, whether or not a dependent of the participant-employee. Dependent coverage does not include coverage, such as family coverage, which includes coverage of the participant-employee.
If you pay part or all of the cost of an employee's dependent coverage, use the amount you paid to figure your employer premiums paid.
Portion of premiums paid.
If you pay only a portion of the premiums and your employees pay the rest, only the portion you pay is taken into account. For this purpose, any premium paid through a salary reduction arrangement under a section 125 cafeteria plan is not treated as an employer paid premium. For more information on cafeteria plans, see section 1 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.
State Average Premium Limitation
The amount of your premium payments that are taken into account in calculating the credit is limited to the premium payments you would have made under the same arrangement if the average premium for the small group market in the rating area in which your employees enroll for coverage were substituted for the actual premium.
State Premium Subsidy and Tax Credit Limitation
Your credit may be reduced if you are entitled to a state tax credit or a state premium subsidy for the cost of health insurance coverage you provide under a qualifying arrangement to individuals considered employees. The state tax credit may be refundable or nonrefundable and the state premium subsidy may be paid to you or directly to your insurance provider.
Although a state tax credit or premium subsidy paid directly to you does not reduce the amount of your employer premiums paid, and a state premium subsidy paid directly to an insurance provider is treated as an employer premium you paid, the amount of your credit cannot be more than your net premium payments. Net premium payments are employer premiums paid minus the amount of any state tax credits you received or will receive and any state premium subsides paid either to you or directly to your insurance provider for premiums for health insurance coverage you provide under a qualifying arrangement to individuals considered employees.
Payroll Tax Limitation for Tax-Exempt Small Employers
If you are an eligible tax-exempt small employer, the credit cannot exceed the amount of certain payroll taxes. For tax years beginning in 2019, payroll taxes, for this purpose, mean only the following taxes:
- Federal income taxes you were required to withhold from employees' wages in calendar year 2019.
- Medicare taxes you were required to withhold from employees' wages in calendar year 2019.
- Medicare taxes you were required to pay for calendar year 2019.
The Small Business Health Options Program Marketplace
The SHOP Marketplace is an online health insurance marketplace where you can shop for and purchase insurance to offer to your employees.
You may be able to purchase health insurance for your employees through the SHOP Marketplace if you have fewer than 50 full time (or equivalent) employees (FTEs). For purposes of the SHOP Marketplace, a full time employee is an employee that is employed, on average, either:
- 30 hours of service per week or
- 130 hours of service per calendar month
For your other employees, determine the full time equivalents by adding their hours worked for each month (not more than 120 for each employee), and dividing that amount by 120.
SHOP eligibility is based on many factors, including your FTEs, but the requirements can vary from state to state. For more information about the eligibility requirements for SHOP, visit Healthcare.gov.